Deep Dives

Is Europe Losing The 5G Race?

Written by Innovator Staff

On an early April morning, a line of nattily dressed business executives snaked around the exterior of Palais Brongniart in Paris. The neoclassical Napoleon-era building was formerly the home of the Paris Stock Exchange. But on this day, it was the scene of a conference organized by telecom carrier Orange to explain the importance of 5G, short for fifth generation wireless broadband technology.

Orange CEO Stéphane Richard kicked off the conference by stating that industry will feel the effects of 5G sooner and more profoundly than consumers. While the transition is just beginning, he said, Orange wants to start now to help companies in transportation, retail, healthcare and media to rethink their business models from the ground up. “Identify all the possible uses of tomorrow and imagine all the possibilities of the day after tomorrow,” said Richard, a scheduled speaker at Viva Technology, a Paris conference taking place May 16–18. “That, in summary, is what awaits us with 5G.”

While wireless standards evolve every 10 years or so, industry experts say the shift from 4G to 5G will have a far greater impact than previous upgrades. Not only will speed increase from 4G’s 1 gigabytes per second to 5G’s 10 gigabytes per second or more, but a far greater number of devices can be connected, and latency — delay in data communication over a network — is expected to all but disappear. That’s important because 5G is positioned as a way of enabling real-time, mission-critical applications such as autonomous vehicles, smart grids, industrial automation, remote surgeries and managing drones.

“There is widespread recognition that 5G is a genuine break from the past,” says Tim Hatt, head of research for GSMA Intelligence. “Before, it was about speed upgrades. Now, it’s about the digitization of the broader economy.”

A report by IHS Markit and Berkely Research Group that assesses the importance of 5G technology to the global economy predicts that by 2035 5G will create 22 million new jobs globally, directly generate $3.5 trillion in economic activity and fuel sustainable long-term growth to global real GDP, impacting the competitiveness of nations.

China, for example, views 5G as key to helping it become a tech leader not just in wireless but in the Internet of Things and artificial intelligence while at the same time boosting its own industries over those of others. While the U.S. had an early lead in 5G, it is expected to be quickly surpassed by China, as is Europe.

It is imperative that European companies embrace 5G technologies quickly, Richard said, because other regions are already moving ahead, and any hesitation could have dire consequences. “I am convinced the story of 5G is a different story than 4G,” Richard said. “This is not a story where everyone can work in their own silo. It’s a story we have to write together. Because we don’t want to fall behind.”

Indeed, as the rollout of 5G mobile wireless networks begins, the stakes for Europe’s economy are higher and more complex than ever before thanks, in part, to the political drama surrounding Chinese telecom equipment maker Huawei, which claims it has better technology and can enable 5G faster than anyone else. To shut out Huawei would be to risk Europe’s economic future, the company says.

“We rank number one in terms of commercial 5G contracts,” scheduled Viva Technology speaker Ken Hu, Huawei’s rotating chairman, said during a December 18 press conference. “This is the result of our far-leading technological innovation.”

Huawei claims to be the first company that can deploy 5G networks at scale. “We can bring powerful, simple and intelligent 5G networks to carriers anywhere in the world, faster than anyone else,” Guo Ping, Huawei’s deputy chairman of the board, said during a February keynote at Mobile World Congress 2019 in Barcelona.

While it is clear that falling behind could leave Europe’s traditional industries at a competitive disadvantage, the U.S. government has raised concerns that Huawei’s technology includes a back door that the Chinese government could use to conduct espionage, introducing security flaws that could leave increasingly critical data vulnerable to theft or spying.

Local champions Finland’s Nokia and Sweden’s Ericsson, two of Huawei’s biggest telecom equipment competitors, offer alternative technology. Both companies have fallen mightily from their respective perches two decades ago when they ruled the global telecom equipment markets.

The decision about whether to let Huawei compete in Europe could profoundly affect the future of these two former super stars at a moment when they are beginning to stabilize their businesses.

Can Europe Succeed Without Huawei?

At a shareholder’s meeting, Ericsson CEO Borje Ekholm, a scheduled speaker at Viva Technology, insisted: “We are well prepared to make the switch to 5G as easy as possible for our customers.”

Orange, for example, will deploy its initial 5G services using a mix of hardware from Ericsson and Nokia. Its 4G networks also run on equipment from these two vendors. Most recently, Ericsson notched a win when Danish service provider TDC selected it to roll out nationwide commercial 5G, as part of a major network overhaul, and provide managed services through the Ericsson Operations Engine. While the company reported flat revenue for 2018, it claimed victory for ending years of declines. At press time it said it had 18 publicly announced 5G deals.

Nokia also reported relatively flat sales for 2018 but it, too, says it’s making strong progress in 5G partnerships, particularly in North America. During a Nokia press event at MWC 2019, CEO Rajeev Suri addressed the Huawei drama by insisting other providers could offer fast, affordable 5G rollouts on par with the offers of the Chinese vendor.

“People everywhere are asking legitimate questions about how best to secure critical networks, about which vendors are appropriate to use, and which are not,” Suri said to media and analysts in Barcelona. “I do want to address comments suggesting that if certain vendors are held back, then Europe’s 5G roll-out will stall and costs will rise. Bluntly, the facts just do not support the claims.”

Even as these companies try to push the pace of 5G, they are also trying to convince business partners that they best be ready for this transition by doing more with 4G.

“We see it as a virtuous investment cycle,” says Phil Twist, Nokia’s vice president for networks marketing and communications. “You can bring in new capabilities now. Many of these new models will start to be delivered by 4G. Because 4G is going to be an important part of the equation for several more years.”

China Racing Ahead

Europe may continue to rely on 4G but China is racing ahead. (see the chart). One of the biggest changes between 4G and 5G is the ability to take the advanced computing power usually kept in the protected “core” of a network and distribute it to other parts of the system. This will provide more reliable high-speed connections and support a massive expansion in the Internet of Things (IoT) -a shorthand term for connecting all kinds of machines, devices and vehicles to each other and to the Internet.

A recent report by the telecom industry association GMSA projected that global IoT connections would triple to 25 billion by 2025. It also forecast that global IoT revenue would quadruple to $1.1 trillion. During a February speech at Mobile World Congress 2019 in Barcelona, Cisco Systems CEO Chuck Robbins said the company expects there will be 4 billion machine-to-machine connections in the coming years. And beyond just the number of connections, each device connected would generate six or more times as much data as a typical device connected today.

This data can be used to train computers and develop artificial intelligence (AI), a field China has vowed to lead. Serving the world’s largest population and a vast domestic market, China’s tech companies can potentially collect data on a much greater scale than their counterparts elsewhere. The rewards could be huge. Accenture, the global consultancy, estimated that the IoT could deliver gains of up to $1.8 trillion in cumulative GDP for China by 2030 through the transformation of manufacturing, resources and utilities.

It is little wonder then that telecom insiders and economists are already warning that failure to launch 5G in a timely way could be catastrophic for the European economy.

Why Europe Risks Falling Behind

The need for speed is being hampered by Europe’s structure. While the EU has set some goals and rules around 5G, ultimately, it’s the member states that make decisions about spectrum auctions. And while the U.S. has essentially four major carriers, Europe has 120 scattered across 28 members states. And many of them are still focused on making back the money they invested in their 4G networks.

“Europe is still lagging behind compared to U.S. and China and South Korea when it comes to 5G,” says Pierre Fortier, consultancy Capgemini’s principal consultant for telecom, media and technology

“Europe is a much more fragmented market. And in a lot of European countries, the 5G spectrum hasn’t been awarded. That creates a climate of uncertainty which adds to the main questions telecom operators have about how to monetize 5G.”

As a result, GSMA Intelligence projects that 30% percent of Europe’s mobile connections will run on 5G by 2025, compared to more than 50% for the U.S. That pace is already making insiders nervous.

Speaking at MWC, Ericsson CEO Ekholm lamented that while North America now has 85% to 90% coverage of 4G networks, Europe is stuck at around 60%. Ekholm warned that the European Union’s regulatory structure is slowing adoption of 5G in the region and urged reforms, or face watching as Europe falls further behind the U.S. and China. “The progress in Europe is being blocked by high spectrum fees, uncertain spectrum duration and heavy regulation,” he said at a company press conference.

Battleground Europe

Huawei’s emergence as a global force introduces a new dimension to that already complex European telecom picture.

When 4G was emerging last decade, Huawei was a small Chinese company. Now it is the leading seller of telecommunications equipment around the world. The company spends 14% of its annual revenue on research and development. And last year it filed the most patent applications of any company in the world, according to the World Intellectual Property Organization, more than double the number by Ericsson and Nokia combined.

That prowess helped Huawei win more than 30% of the global telecom equipment market in 2018, according to the Dell’Oro Group. In contrast, Nokia’s share fell to around 17%, and Ericsson’s below 16%. Back in 2013, the three had around 20% of the market each.

Huawei’s growth has triggered a fierce lobbying campaign by the U.S., which has insisted for several years that Huawei’s equipment will be used to create backdoors for Chinese spying.

The U.S. has continued to ratchet up the pressure in recent months. In December Meng Wanzhou, Huawei’s CFO and daughter of its founder, was arrested in Canada. And U.S. prosecutors filed criminal changes against Wanzhou and Huawei, alleging theft of intellectual property from T-Mobile and other companies. Meanwhile, Australia and New Zealand have banned use of Huawei equipment, as has Taiwan, over concerns that Huawei could build backdoors into its products on behalf of the Chinese government.

In an MWC 2019 keynote, Vice-Chairman Ping fired back at the accusations that Huawei equipment includes backdoors for spying by the Chinese government by pointing to the Prism program used to collect data by the U.S. government (which was exposed by Edward Snowden). Ping said there is no evidence Huawei hardware allows such abuses.

“Let me say this as clearly as possible: Huawei has never built backdoors, and we will never allow anyone to do so in our equipment,” he said. “We take this responsibility very seriously.”

In March, the company filed a lawsuit in a U.S. court, challenging the constitutionality of the 2019 National Defense Authorization Act that was used to justify the government’s ban on its equipment. The company said if allowed to compete for deals, it could lower costs of wireless infrastructure in the U.S. by 15% to 40%.

In the meantime Huawei is placing even greater emphasis on Europe, opening a cyber security center in Brussels and courting the European press.

The EU and various member states are under pressure from the U.S., which has threatened that it may limit cooperation with allies that use Huawei equipment, but there is no consensus on banning Huawei equipment in Europe.

The European Union declined to call for a ban on Huawei equipment. At press time the U.K. government was considering giving Huawei a contract for parts of its 5G network. Germany has also stopped short of banning Huawei. “There are two things I don’t believe in,” German Chancellor Angela Merkel said of Huawei at a March conference in Berlin. “First, to discuss these very sensitive security questions publicly, and second, to exclude a company simply because it’s from a certain country.” Meanwhile, Sunrise, a carrier in Switzerland, has announced it would use Huawei equipment to begin deploying 5G networks this year.

“Despite the efforts in some markets to create fear about Huawei, and to use politics to interfere with industry growth, we are proud to say that our customers continue to trust us and recognize our contribution to the industry,” Hu said in a statement posted on the company’s website.

Huawei could end up leading in Europe but, say analysts, Europe does not look poised to be a leader in 5G. And if predictions that it will lag behind are true it won’t just be European telecom equipment makers but European industry as a whole that will lose out.

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Innovator Staff